Merrill Lynch docked $15 million for deceptive RMBS pricing

Merrill Lynch, Pierce, Fenner & Smith Inc. has agreed to pay more than $15 million in disgorgement and penalties to settle charges that its employees misled customers into overpaying for residential mortgage backed securities (RMBS). The broker-dealer agreed to return $10.5 million to customers and pay $5.2 million in civil penalties after the SEC found that Merrill Lynch deceived investors about the price it paid to acquire the securities (In the Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc., Release No. 34-83408, June 12, 2018).

"In opaque RMBS markets, lying to customers about the acquisition price can deprive investors of important information," said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit in a news release. "The Commission found that Merrill Lynch failed in its obligation to supervise traders who allegedly used their access to market information to take advantage of the bank’s own customers."

Failure to supervise. Specifically, the SEC's order found that from June 2009 through December 2012, Merrill Lynch failed to supervise personnel regarding the firm’s secondary market purchases and sales of non-agency RMBS. Although Merrill Lynch had policies that prohibited false or misleading statements and had the means to monitor communications for these statements, the firm failed to design and implement reasonable monitoring procedures. In addition, while Merrill Lynch had policies that prohibited excessive mark-ups, the policies and procedures to prevent this conduct were also not reasonably designed and implemented.

Misleading statements. In one instance, Merrill Lynch made profits of approximately $386,042 on one intra-day transaction after purchasing $29,966,000 of a bond at 70-00 and selling $15,966,000 of the bond at 74-00. Among other things, one of Merrill Lynch’s traders misrepresented to a seller that the firm had received a bid at a price of 68-00 rather than the 74-00 price bid by the buyer. The trader also misrepresented that he had pushed the buyer "pretty hard" to get the buyer to a bid in the high 60s when the salesperson had sought a price of 75-00 and had received a bid of 74-00. Finally, the trader misrepresented that he had received a 69-00 bid from the buyer, when, in fact, the buyer had bid 74-00 for the bond.

Excessive mark-ups. The SEC also found that Merrill Lynch’s traders charged customers markups that bore no reasonable relationship to the prevailing market prices. For example, in one instance Merrill Lynch purchased $15,621,000 original face amount of a bond at a price of 1.86. Later that day, a trader, through a salesperson, sold the bond to a Merrill customer at a price of 4.00. The 4.00 price represented an intra-day mark-up of 115 percent and profits to Merrill of approximately $334,289.

Censure and penalties. Without admitting or denying the findings, Merrill Lynch consented to be censured for failing reasonably to supervise its personnel within the meaning of Exchange Act Section 15(b)(4)(E). Merrill Lynch also agreed to pay a penalty of approximately $5.2 million, and pay disgorgement and interest of more than $10.5 million to customers that were parties to the transactions that were the subject of the order.

In determining to accept the offer, the Commission considered the remedial steps undertaken by Merrill Lynch, including, among other things, creating an electronic communications monitoring tool to compile communications related to a trade in which the mark-up exceeds a certain percentage. The firm also enhanced its surveillance procedures for preventing excessive mark-ups by requiring surveillance employees to document and record the specific bases for the resolution of mark-up alerts and by establishing an independent review of all RMBS trades with mark-ups above 1.5 percent.

Interested in submitting an article?

Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on securities regulation legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.

Create a PasswordPlease enter a PasswordYour password must be at least 6 characters longNo validation was done for leading or trailing spaces in password.

Yes, I would like to create an account.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can create an account to store my contact information and order history to facilitate ecommerce transactions. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Online subscription product purchases require that you create an account.

Email Address
This field is required
Please Type Valid Email Address
Email Address has a minimum length of 0.
Company
This field is required
Country
This field is required

Yes, send me information on similar products and content from Wolters Kluwer.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can be contacted about similar product(s) and content. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates. Additionally, if the products being inquired about are fulfilled by Kluwer Law International, my personal information will be shared with Kluwer Law International and processed in the Netherlands or the United Kingdom where it operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Thank you!

We apologize!

Interested in submitting an article?

First Name
This field is required

Last Name
This field is required

Email Address
This field is required
Please Type Valid Email Address
Area of Expertise
This field is required
Article Idea for Consideration
This field is required

Yes, send me information on similar products and content from Wolters Kluwer.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can be contacted about similar product(s) and content. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates. Additionally, if the products being inquired about are fulfilled by Kluwer Law International, my personal information will be shared with Kluwer Law International and processed in the Netherlands or the United Kingdom where it operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Success

We appologize

Request Free Trial

Thank you for your interest in a free trial! We look forward to connecting with you.

First Name
This field is required

Last Name
This field is required

Email Address
This field is required
Please Type Valid Email Address
Phone Number
This field is required
Title (Optional)Company Name
This field is required
Organization Type
This field is required
Country
This field is required
State or Province
This field is required

Yes, send me information on similar products and content from Wolters Kluwer.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can be contacted about similar product(s) and content. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates. Additionally, if the products being inquired about are fulfilled by Kluwer Law International, my personal information will be shared with Kluwer Law International and processed in the Netherlands or the United Kingdom where it operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Thank you!

We aplogize!

Message Us

Thank you for your inquiry! We look forward to connecting with you.

First Name
This field is required

Last Name
This field is required

Email Address
This field is required
Please Type Valid Email Address
Phone Number
This field is required
Company Name
This field is required
Country
This field is required
Topic (Optional)Account or Invoice Number (Optional)Comments (Optional)

Thank you. We will contact you soon!

We apologize, but we failed to receive this message.

Thank You!

Thank You.

Your request has been forwarded to a Wolters Kluwer representative who will contact you shortly!